Gold rises towards $1,120/oz on strong sentiment

By Frank Tang and Jan Harvey

NEW YORK/LONDON (Reuters) - Gold hit record highs near $1,120 an ounce Wednesday, stirred by renewed buying interest by central banks, and bullion should benefit from expectations that an erratic economic recovery will keep U.S. interest rates low.

The metal is now poised for more gains, analysts said, with the weak dollar helping gold build on a rally that began last week after the IMF sold 200 tons of bullion to India's central bank, raising the prospect of more official sector buying.

Joseph Foster, manager of Van Eck International Investors Gold Fund, said that the gold market is currently being driven by worries about paper currency depreciation and potential inflation.

"Firming commodities prices and the liquidity being created by current monetary policies could eventually bring much higher levels of inflation," said Foster, who manages more than $800 million mutual fund assets.

Spot gold hit a high of $1,118.35 an ounce earlier in the session. Bullion was at $1,116.95 an ounce at 2:29 p.m. EST (1929 GMT), versus $1,105.30 late on Tuesday.

U.S. December gold settled up $12.10, or 1.1 percent, at $1,114.60 an ounce on the COMEX division of the NYMEX.

The dollar index initially fell a quarter of a percent to a 15-month low and the euro rose to a two-week peak within sight of last month's 2009 high of just over $1.5060. <FRX/>

Gold held gains in spite of the dollar's bounce in the late sessions.